What Has American Been Buying and Selling?

Four times a year, we get a glimpse into the portfolios at American Funds. By comparing more recent portfolios with past ones, we can also observe the trading activity that took place and identify broader moves, if any, that are taking place across the lineup. Filings for American Funds' fourth-quarter 2008 activities came out in mid-February 2009, and I've combed through them to see what interesting moves it made during a historically tumultuous market.

First, an organization note: Although American has a central research group, it has divided its managers and analysts who serve its retail mutual funds into two main research groups: Capital World Investors and Capital Research Global Investors. We'll search both major groups' holdings and activities to see what trends we can find. American runs its funds, of course, by using the multimanager system. Some funds are run by managers from one group, some from the other, and still others with some managers from both groups. Additionally, some managers may run sleeves of multiple funds. Because of these arrangements, it's impossible to ascribe a position to a particular manager. A new position may find its way into multiple funds if multiple managers are buying it or if a single manager runs sleeves of multiple funds.

Lots of Tech
CWI bought technology.  Intel (INTC),  EMC ,  Maxim Integrated Products , and  Microsoft (MSFT) all ranked among its larger purchases for the quarter. Technology companies look cheap to many observers, including Morningstar's equity analyst team. Not only are price/earnings ratios lower than at any time in recent memory, but firms in the technology space appear to be exceedingly well capitalized. Maxim, a maker of integrated circuits, for example, has 1.5 times more cash than total debt on its balance sheet. The EMC and Maxim purchases have worked out best among CWI's tech picks so far in 2009, with EMC's stock price dropping around 4% for the year through early March and Maxim remaining flat.

CRGI's top additions reflected CWI's interest in technology, though it favored slightly different companies-- Corning (GLW) and  Sun Microsystems --in addition to Maxim. Both Corning and Sun are up for 2009 through early March. CRGI didn't gravitate to some of the blue-chip tech firms.  Cisco (CSCO),  Oracle (ORCL), and Microsoft were among its most significantly reduced positions for the quarter, showing that its managers invest on a stock-by-stock basis instead of trying to choose sectors or industries. The different buying and selling patterns observed in tech between the two groups also shows the independence of the various managers, some of whom are buying stocks that others are selling.

Not Enough to Make a Difference
The Maxim purchase displays the limitations of American's size. CWI and CRGI each promptly initiated their positions in Maxim in the quarter, buying around 10% and 12%, respectively (or 22% in total), of the entire firm, whose current market cap is around $3.2 billion. This is interesting because if Capital hadn't split itself into two groups, it may not have decided to own so much of a firm. So the split has allowed it to own larger chunks of companies.

However, it's unclear that owning 20% of a mid-cap company's outstanding shares is significant for a group of funds as big as American's. While it's impressive that American can snag more than 20% of a mid-cap firm in a quarter (albeit during one when sellers were plentiful), it appears that Maxim doesn't occupy a significant position in any of American's funds. For example, Growth Fund of America alone owns 5.6% of Maxim's shares, but the position takes up less than 0.20% of its portfolio. So, although it seems as if owning 20% of a firm must indicate serious conviction in it among the American managers who are buying it, it's not clear that the conviction of American's managers can always be reflected in the funds. For all of the qualities we like about American, the behemoth size of its funds presents limitations.

Also, despite the fact that the position doesn't mean much to any one fund, it could be difficult to unload if the managers' thesis for the stock changes.

An Upscale Retailer
While many investors--including American--were hunkering down with lower-end retailers like  Wal-Mart (WMT) and  Costco (COST), CWI purchased 10% (nearly 22 million shares) of upscale department store  Nordstrom (JWN).

Nordstrom isn't exactly debt-free. It has around $2 billion in long-term debt against $6 billion in assets. However, it has generated more than $150 million in operating income in each of the past four quarters, which covers its quarterly interest payment of around $34 million comfortably. The high-end retail industry is an embattled area of the economy. Although we haven't yet talked to American's managers about the purchase, it's a decent bet that their reasoning is that Nordstrom is in reasonable financial shape and will make it through dark times as the current economy weakens struggling competitors  Macy's (M) and  Saks . Still, as with Maxim, Nordstrom remains a tiny part (less than 0.20%) of CWI and doesn't show up as a 1% position in any of American's funds, despite CWI's significant percentage ownership of the firm. 

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